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Fineract based re engineering on lending products
Fineract is a robust open-source platform for financial services. It covers a variety of banking solutions including loan products. This piece of guide focuses on a new Fineract improvement on its loan scheduler. The focus here is to change the repayment frequency of loan schedule. This capability allows us to configure a semi monthly Loan Product and run different semi monthly loan schedules.
But first what, is a semi monthly product. As the name suggests, a semi monthly product is a loan product that can be repaid twice each month for the duration of the loan term, until its maturity. This involves repayment divided into two equal halves for each month.
A semi monthly loan schedule when each month, the repayment date falls on 15/30 looks like following:
The need for a semi monthly product came up during a case study in 2020 that Muellners actively pursued and has the following base conditions:
- A semi monthly product defines 2 days between the 1st and the 31st of a month which will represent the 2 repayment dates for each month of the loan term.
- The difference of days between the 1st and 2nd repayment dates must be at least 14 days or at most 18 days. This ensures each repayment date is equidistant apart.
To create a new loan product that qualifies as a semi monthly product, it’s not very different from your standard loan product creation process in the Mifos X client application. The process goes as follows:
- Go to the products section on the admin page.
- Select the loan product category and create a new loan product
- Fill in your loan details
- Under the terms tab, you can use the following sample values for a demo case definition:
- Principal Amount: 10,000
- Number of repayments: 12
- Nominal Interest Rate: 0.777
- Repaid Every: 2, semi month
- Your loan product terms should like this afterwards:
- Complete the remaining steps, review and submit your loan product.
You can now create a new loan account with the above loan product. You can refer to this guide.
Now, I will detail what happens under the hood for this new loan scheduling feature to be possible. The loan scheduler in Fineract has (so far) supported a few repayment frequency strategies i.e daily, weekly, monthly. This was the first challenge that we faced. Basically, a new definition of repayment frequency was required.
The errors that I saw are following;
I overcame this and we were able to create loan products with a semi month frequency definition. Of course this required a periodic interest rate to go in as a Nominal Interest Rate.
In the above screenshot, Finally able to configure a loan product with semi monthly definition. Phew.
But, there is no support for a semi monthly repayment strategy and to integrate this new feature successfully, some changes to the Fineract infrastructure were made:
- Database changes: The following amendments were made to the m_loan, m_loan_product,m_loan_repayment_schedule.
- Code changes:
- First and utmost was to add the 2 major components needed for the semi monthly module which were the first and second payment dates for the loan life cycle.
- Corresponding fields were added to the UI for choosing a semi monthly loan frequency and entering a start and end date.
- Semi monthly start date and end date were added to the API and the appropriate validations of entered dates were added for cases of a semi monthly loan.
- Loan repayment frequency modes were extended to support semi monthly loan definitions in addition to the already existing definitions by adding the _ semi-monthly _ loan repayment frequency term type.
- A conditional logic was also introduced to set the states where semi semi-monthly loan is used and performs payments scheduling and other computations accordingly.
- A new subroutine was introduced in the repayment schedule generator to handle repayment schedule generation for a semi-monthly loan which also includes loans.
- Leap year criteria is also a tough part of the scheduler change due to the unhandled support for leap years. This was fixed by adding a conditional statement where appropriate scheduling will be done for a leap year, that is instead of a last date being the 28th, it will be the 29th instead.
The leap year criteria shows up for a loan life cycle running during the year 2020. You can see a stable repayment schedule in the screenshot below:
The implementation will not be complete without testing. 2 major types of tests were made; testing using the Fineract integration test framework and testing using the Mifos X client.
You can refer to this document for test coverage using the Fineract integration test framework
You can see another predominant examples from our case study where 10 and 25th of each month are used as test dates. However, this feature also contains a lot many permutations and combinations of two dates in each month. You should see the videos I have published for this.
I created a YouTube video playlist also to present the test cases that I covered for this module using the Mifos X client. You can check them out here.